AN APPRAISAL IS AN opinion of value. A good appraisal is unbiased, substantiated, and unambiguous. Appraisal reports should be prepared and delivered by a trained, reputable professional who is well versed in appraisal methodologies, and knowledgeable about the material being appraised. The appraisal profession has changed and grown considerably in the last fifty years—spurred by regulatory agencies’ requirements, high prices achieved on objects in expanding markets, and technological advances that have made relevant market, ownership, and object information easier to access and share.
Even though museum staff is not allowed to appraise objects, they have a myriad of reasons to understand value. As 501(c)(3) organizations, many museums are the recipients of donations for which the donors will likely claim deductions on their tax returns. It is neither expected nor prudent for museum professionals to provide advice to their donors, yet understanding the rules and regulations will aid them in recognizing the parameters that apply to donations. This knowledge will allow museum staff to provide an appropriate level of guidance to donors and perform a valuable service by arming them with useful suggestions and information when steering them toward their accountants, appraisers, and legal advisors.
In the United States, the appraisal profession is guided by the Appraisal Foundation (TAF), the principal authority of the valuation profession. The foundation was authorized in 1989 by the US Congress, which enacted the Financial Institutions Reform, Recovery, and Enforcement Act1 that sanctioned the TAF as the source of appraisal standards and qualifications. TAF establishes the minimum qualifications for personal property appraisers and di rection for recognized valuation methods and techniques for all valuation professionals. This leadership enhances the profession by developing standards to ensure that appraisals are meaningful, independent, consistent, and objective.2
TAF standards are communicated through the Uniform Standards of Professional Appraisal Practice (USPAP)—published biannually by TAF. USPAP includes standards for various appraisal services, including real estate, personal property, business, and mass appraisal. Compliance is required for both state licensed and certified appraisers who work in real estate.3 Personal property appraisers are neither licensed nor certified by states. Instead, they are accredited (or certified) by their own organizations. There are three nonprofit organizations that include personal property appraisers that are sponsors of TAF—the American Society of Appraisers (ASA),4 Appraisers Association of America (AAA),5 and the International Society of Appraisers (ISA).6 However, there are many individuals who write appraisal reports and call themselves personal property appraisers even though they are not accredited, do not belong to a recognized society, and do not keep up with the rules, regulations and methodologies of the appraisal profession.
Qualified appraisers in the United States follow USPAP, which helps to promote public trust and is the only nationally recognized ethical and procedural guidance for personal property appraisers. It is important to note that although some appraisers will state that they are USPAP certified, this is a misrepresentation. Simply completing a USPAP course does not entitle anyone to be a USPAP-certified appraiser because USPAP does not certify appraisers or appraisals.7 Appraisers must be continually up to date on USPAP, and their appraisal assignments should be performed in conformity with the latest iteration of USPAP.
Aside from being a repository for cultural objects, museums must care for their collections in perpetuity or at least until an object is deaccessioned. It is not unusual, and is perfectly acceptable, for a museum to assign a value to an object in certain circumstances, such as for insurance needs, bargain sales, and Internal Revenue Service (IRS) Form 990 preparation. Nevertheless, museum staff must be cautious when called upon to assign a value to an object. There are a number of disparate markets and market levels that can be referenced and applied, often resulting in different value conclusions. Mixing markets can result in confusion and inconsistencies. For example, a registrar or curator might use an auction sale, or they might call a dealer to ascertain their opinion on a value to use for insurance coverage. These numbers can be wildly different, so an understanding of values is essential.
When discussing values, it is of paramount importance to understand the differences in appraisal terminology. Critical to understanding the vocabulary is to be aware that the term value is an economic concept that expresses an opinion based on the monetary relationship between properties and those who buy and sell those properties. Value is different from cost or price. For example, NASA accidentally sold an Apollo 11, 1969, moon bag (lunar sampler return pouch) to someone for $995 in 2015—that is the price the buyer paid. However, the pouch later sold for US$ 1.8M at Sotheby’s New York in 2017.8 Price and value can clearly be divergent.
When appraisers are asked, “What is this object worth?” they will first want to know how the value is going to be used. Appraisers call this intended use, and it is the first step in understanding the economics of valuation. If the object will be donated to a charity, the value is a specific number. If the questioner wants to know how much to insure the object for, the value is most likely to be a different number. If the questioner needs money immediately and plans to sell the same object at a local auction house, the value is again different. A value is not what someone pays or has paid for a similar object but depends on other factors such as timing (the effective date), the use of the appraisal, and the type of value sought.
There are times when a museum is required to use an appraiser. For example, the museum’s collection management policy (CMP) might necessitate that any objects valued more than US$ 1M require two appraisals before deaccessioning. Or a valuation for a possible purchase might be needed so a price point can be set prior to acquisition. For both purposes, a museum’s CMP should specify the type of value the museum must obtain and what staff positions are responsible for establishing the value conclusions.
As noted, there are different types of values. The museum might want marketable cash value (anticipated net proceeds or cash in hand that would be yielded from the sale of a property once all costs of sale were deducted—that is, the net received by the seller), replacement value (the price in terms of cash or other precisely revealed terms that would be required to replace one property with another),9 or fair market value—which is a term from the US Department of the Treasury Regulations and is used for tax-related issues (the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts).
There is no licensing for personal property appraisers. Most appraisers go through a series of classes and testing and are accredited (or certified) through their organization (AAA, ASA, or ISA). Each of the appraisal associations has different levels of credentialing for appraisers. Museums should be careful when recommending appraisers to their donors, especially in cases where the appraisal is needed for income tax purposes. There are specific qualifications required by the US Department of Treasury for appraisers who write appraisals for tax purposes.10 If the donor has a problem with the appraisal or the appraiser, the museum could bear the brunt of their displeasure. The safest thing to do is to simply refer donors and the public to the organizations and not show a preference for an individual appraiser.
If the museum does provide a list of appraisers, make sure to alphabetize the appraisers’ names so as to not show partiality. If museum staff thinks there is a need to identify some appraisers by name, it might behoove them to refer rather than recommend or to say that “other of our donors have been happy with X appraiser.” Can the museum also direct the donor to auction houses? They can, but they should be acutely aware of potential conflicts of interest. See the US Tax Court decision in Estate of Kollsman v. Commissioner of Internal Revenue (2017), regarding arm’s-length transactions.11
When bidding on an appraisal assignment or presenting a proposal, appraisers provide a quote based on either their rate per hour, per object, or for the total project. For obvious reasons, it is unethical to accept payment for services based on the value of the objects being appraised. The appraiser, who is hired to complete the assignment, provides a letter of agreement or contract to the museum. Appraisal agreement contents routinely include the name of the property to be appraised and its location, the intended use of the appraisal, who the appraisal is for (intended users), the type of value to be concluded, scope of service, what materials and information the museum and appraiser will each provide, the duration of the assignment including deadlines, payment schedules, terms, fees, and other cost, indemnifications (only if necessary and if so, both the museum and appraiser ought to indemnify each other), and privacy requirements.
After being hired, the appraiser will often request information from the donee. Object files can provide the appraiser with a wealth of information to assist in concluding value, including exhibition histories, literature citations, condition reports, and provenance. If there is any confidential information in the file, it can first be removed by staff. Providing this information to the appraiser helps save time and additional fees paid by the museum. Because it is the appraiser’s responsibility to witness, identify, and value the property to be appraised, appraising from photographs is not ideal. Caution is recommended when accepting appraisals without inspections.
Although most appraisals are written, they can be presented orally, but oral appraisals must still conform to USPAP. The appraiser does the same amount of research and analysis as for a written appraisal report, only the reporting vehicle is different (oral, not written), so this is a less costly option. When a museum or collections professional asks appraisers what they believe the value of an object to be, and the appraiser provides a number, the appraiser has just done an oral appraisal. This explains the reluctance of appraisers to answer such questions intuitively without completing the necessary research.
An appraisal report should list the people who rely on the appraisal in addition to the client (e.g., the donor’s legal or financial advisor). Other readers (such as the IRS, the donee, third-party insurers, or board members) may read or receive the appraisal report, but they are not considered intended users as defined by USPAP. The appraisal report is related only to the client’s use.12 Intended users are identified by the appraiser through communication with the client.
Museums rarely pay for appraisals to insure their entire permanent collection. The cost can be prohibitive, and some museums prefer instead to use their capital to safeguard the collection—for example, by investing in environmental controls and security provisions. Museum staff often declare their own opinions of value. The insurance industry refers to these as agreed values (and these are essentially the values from lenders on loan agreements). Some museums will have their entire collections insured in this manner. Other museums insure collection objects when they are traveling and at most risk. Many museums insure their collections on a loss-limit basis, in which the amount to be insured is based on a risk-management assessment and probable maximum loss. Insurers often ask museums to provide a value for their top ten objects (see CHAPTER 6D, “Insurance”). Either museum staff or a hired professional appraiser creates this type of list.
It is good practice for museums to have a system in place that addresses situations in which lenders place a value on a loan agreement that is out of sync with like properties. Accepting overinflated values on loans can place the museum in a precarious position. Some lenders want to insure based on emotional values (e.g., “this vessel was given to me by my great grandmother and is irreplaceable”). Because these values are not based on market evidence, they have no grounds. If the value is agreed on, the insurance company is obliged to pay, and the museum will be left paying higher premiums for a lower-value item. Furthermore, ethical issues could surface regarding a museum’s support for an unreasonable value if the lender later relies on such a value for another use.
A museum can protect itself when receiving a loan agreement with a blank value line if the agreement states that in such a case, the museum insures the loaned property based on its own estimated value. The loan agreement should state that this value is for insurance coverage only and should not be considered an appraisal that the lender can later rely on for another purpose.13
Replacement values are the values that museums use to insure their collections or loans. The ASA defines replacement value as “the price in terms of cash or other precisely revealed terms that would be required to replace a property with another of similar age, origin, appearance, provenance, and condition, within a reasonable length of time in an appropriate and relevant market.”14 However, the museum’s insurance policy will normally state that in the event of loss or damage, the basis of valuation will be current market value. Interestingly, the concept of current market value is almost never defined; it is specifically opened-ended. Insurance exists for the insured to be made whole again in the event of a loss or damage. Appraisers base a replacement value appraisal on the highest reasonable prices, so if there is a loss, the insured can replace the property in a timely manner. The replacement value might include shipping, crating, or assistance from a consultant, preparator, or agent, but it is not a pie-in-the-sky number.
Another type of coverage for museums was developed by the US government in its Artifacts Indemnity Act of 1975 and subsequent revisions, which seeks to “provide indemnities for exhibitions of ar tistic and humanistic endeavors, and for other purposes.”15 The federal Arts and Artifacts Indemnity Program16 is a risk-management program that allows certain US nonprofit organizations to apply for additional exhibition protection for eligible objects coming in or going out of the country for temporary exhibition. In this program, the government legislates maximum sums to cover damage and losses under very strict rules. Commercial insurance covers the sliding scale deductible, and any excess of approved indemnity amounts, for validated claims for loss or damage.17 The type of value in the indemnity program is based on fair market value.
There are times when an object is damaged but can be repaired, so the result is not a total loss. Nevertheless, that repair might lessen the value of the object and the museum may request compensation. Appraisers refer to this as diminution of value. Diminution of value means that the object is less marketable due to repairs, and the net monetary loss is the loss of value. In situations such as these, two appraisers (one representing the insurance company and one representing the museum) usually value the damaged object and provide their value opinions based on the loss. Most insurance policies allow for a third appraiser or umpire to be hired for cases that require arbitration.
The US Internal Revenue Code (IRC) has long provided taxpayers with incentives to donate appreciated property to museums. Since the 1917 War Revenue Act, taxpayers have been able to claim deductions on charitable contributions to qualified charities.18 The deduction was codified in Section 170 of the IRC. Numerous revisions to the statutory provisions have occurred over the years. One of the most sweeping reforms was introduced with the Tax Reform Act of 1984, which was part of the Deficit Reduction Act of 1984 (Public Law 98–369),19 in which Congress tightened compliance provisions for contributions and required written appraisals for contributions of property for which a deduction of $5,000 or more is claimed. The act provided reporting requirements for donors and donees, including the use of Form 8283 (Noncash Charitable Contributions)20 and 8282 (Donee Information Return).21 The guidelines also included the first explanation of who constituted a qualified appraiser, which was exceptionally basic. Originally, appraisers had to be someone who was not excluded22 and who presented themselves to the public as appraisers.23 The guidelines barred donees from providing their donors with values for their contributions. The Pension Protection Act of 2006 (PPA) and the implementing regulations provided more stringent and specific requirements.
The Pension Protection Act was signed by President George W. Bush on August 17, 2006. Its provisions were implemented by the IRS and Treasury Department through regulations published on July 30, 2018. The new regulations provide an expanded definition of a qualified appraisal and qualified appraiser that apply to contributions made on or after January 1, 2019. Check the IRS website for a definition and more details of who is a qualified appraiser and what constitutes a qualified appraisal.24 A qualified appraiser is someone who:
An individual who cannot be a qualified appraiser is someone who:
A qualified appraisal is one prepared by a qualified appraiser in accordance with generally accepted appraisal standards (“the substance and principles of USPAP”).
The appraisal must include a sufficient property description including the object’s condition and noting any restrictions on the donee’s use of the property. When taxpayers make a charitable contribution, they relinquish all control, and the donee is then free to use the object as they wish for the benefit of the public. If a donor places a restriction on the disposition or use of the donated property, the fair market value must reflect that restriction.25 Therefore, any restrictions on the donation must be disclosed in the appraisal report. Appraisers must be told about the restrictions and should be given a copy of the deed of gift. Countersigned deeds of gift should be attached to the appraisal.
Appraisers completing an assignment for a donor generally request a copy of the donee’s condition report. Physical condition is a key factor for concluding a property’s value for a tax-related occurrence. Appraisers may adjust value conclusions based on conditions that negatively affect the object or its potential marketability. A qualified appraisal includes information about the appraiser’s credentials and knowledge about the property as well as an identification (tax ID) number. The appraisal should include a statement that the appraisal was prepared for income tax purposes. The effective date of the appraisal, the date the opinion of value applies to the property, is the date of (or expected date of) title transfer.
Neither the IRS nor USPAP requires an appraiser to inspect the appraised property, though as mentioned, it is wise that they do. If appraisers do not witness the property directly, USPAP requires them to disclose that in the certification included in the appraisal. A qualified appraisal must also include the fair market value of the property or properties, the methodology used by the appraiser, and the basis for valuation. Appraisals must be signed and dated.
Museums must ensure that donees receive a contemporaneous written acknowledgment (CWA) for each donation. It is best practice to provide donors with a letter that is distinct from the deed of gift. The CWA should confirm that the charity provided “no goods or services” in exchange for the contribution of any donations with a value of $250 or more. Specially, the written acknowledgment required to substantiate this contribution must contain the following information:26
Any kind of barter (a taxable event) or monetary receipt from the donee (including the donee paying for the appraisal, the production of a catalog in exchange for a gift, and payment for conservation before the gift is transferred) must be acknowledged in the CWA. If donors do not have the CWA when they file their taxes, they could potentially lose the tax deduction. The burden is on donors to obtain the CWA before filing a tax return.27 Because there is little justification for donors to be placed in that situation, the museum should send donors a separate CWA as early as possible. Sometimes, at audit time, a donor will try to argue that a variety of documents, viewed as a whole, constitute a CWA, or that a deed of gift is the CWA. See the endnotes for a recent example of a court case in which a deed was treated as a CWA.28 Donees should keep a copy of the CWA in case donors cannot locate their copy of the document during an audit.
The appraisal prepared for a donation and written for income tax purposes concludes the fair market value of the donated property. The definition for fair market value originates from the IRC, which is the law enacted by Congress in Title 26 of the US Code. It is often written as 26 U.S.C., or referred to as the Internal Revenue Code. Regulations, on the other hand, are the Department of the Treasury’s interpretations of the IRC, which is written as the Code of Federal Regulations or 26 CFR. To best comprehend regulations, the IRS issues guidance publications that explain implementation of the regulations. The guidance publications for charitable contributions include IRS Publication 526 (Charitable Contributions) and IRS Publication 561 (Determining the Value of Donated Property). There is also guidance in the instructions for forms 8283 and 8282. Because these publications have not been updated to coincide with the newest regulations, current procedures are based on the regulations themselves.
The type of value that the appraiser uses for tax filing (as stated previously) is fair market value. The first sentence of the definition of fair market value is “the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts.”29 Most museum registrars have memorized this definition, but it is a shortened definition; separate definitions apply to gift tax and estate tax.
The full definition for fair market value for charitable contributions in the CFR continues,
If the contribution is made in property of a type which the taxpayer sells in the course of his business, the fair market value is the price which the taxpayer would have received if he had sold the contributed property in the usual market in which he customarily sells, at the time and place of the contribution and, in the case of a contribution of goods in quantity, in the quantity contributed. The usual market of a manufacturer or other producer consists of the wholesalers or other distributors to or through whom he customarily sells, but if he sells only at retail the usual market consists of his retail customers.30
Note that the word retail means sale to the end user, and not intended for resale. This means that the auction market can also be the retail market.
These definitions are for federal taxes. The definition of fair market value varies in some states. For example, in California, the definition states that
the fair market value of the property taken is the highest price on the date of valuation that would be agreed to by a seller, being willing to sell but under no particular or urgent necessity for so doing, nor obliged to sell, and a buyer, being ready, willing, and able to buy but under no particular necessity for so doing, each dealing with the other with full knowledge of all the uses and purposes for which the property is reasonably adaptable and available.31
This state law definition specifies that the fair market value is the highest price. Other government jurisdictions have their own definitions, as do other countries. In Canada, the definition is based on judicial case precedents and states that fair market value is the “highest price, expressed in terms of money, that a property would bring in an open and unrestricted market between a willing buyer and a willing seller who are both knowledgeable, informed, and prudent, and who are acting independently of each other.”32
As noted previously, properties that sell in different markets often sell for different prices. Prices in dissimilar markets and market levels can vary significantly. For fair market value in the United States, the appraiser bases conclusions on the market where the type of property sells most commonly to the ultimate consumer (in other words, not for resale). This could be, for example, either the auction market or gallery market. There are other markets, depending on the property type.
Museum donors may not always need to obtain an appraisal for their gifts. For deductions of art objects and certain other personal property, these are the general rules:33
Note that if the value is close to $5,000, the donor can claim $5,000 or less and avoid the appraisal requirement.
Art Appraisal Services (AAS) is a department in the Office of Appeals for the IRS and is staffed by appraisers who review appraisals submitted for tax purposes. The Art Advisory Panel of the Commissioner of Internal Revenue (the Panel) is comprised of a group of volunteer curators, auction specialists, dealers, and scholars. The Panel makes recommendations to the AAS on appraisals they receive through audits that have a claimed fair market value of $50,000 or above. For art valued at $20,000 or more, the taxpayer must provide a photograph on request. For art valued at $50,000 or more, the taxpayer must attach a photograph. Rules for photographic requirements are listed on the IRS’s website.34
There are good reasons for the donor to provide the donee with a copy of the appraisal report. For one thing, museums can use the thorough research provided in the appraisal, which often includes the original invoice, information on provenance, and catalogue raisonné citations. Also, reading a well-written qualified appraisal helps staff become more conversant in understanding how an argument for value is developed and defended. Museum personnel should not rely on the fair market value in the appraisal report for uses other than the value as of the date of contribution. Usually, but not always, the fair market value is less than replacement value, which would be the relevant value for insurance coverage. The museum may not be able to replace the lost or damaged property in a timely manner if they insure it based on fair market value.
Providing a copy of an appraisal to a donee can only be done if approved by the client. If the taxpayer wants to claim a deduction, the donee must be given Form 8283, which was formally known as the appraisal summary (an appraisal report was never an appraisal summary). However, the current regulations removed the term appraisal summary, and it is now simply called Form 8283. The fair market value does not have to be stated on Form 8283 when it is given to the donee.35 Moreover, some donees prefer not to know the value because they do not want to be accused of aiding and abetting any understatement of tax liability. The client may not want the donee to know the appraiser’s conclusion of value. Some museums stipulate that trustees must donate a certain amount in cash or tangible property to maintain their position on the board; this requirement is separate from the IRS rules for appraisers and donors.
IRS regulations do not allow an appraisal to be completed more than sixty days prior to the date of donation. Appraisers can begin the research at any time, but the property must be valued as of the effective date (the date of donation). When the report is completed prior to the donation, the appraiser must provide the expected date of the contribution. If the title transfer date changes, the appraisal must be reissued with the new effective date, considering any changes in the market that occurred between the two dates. For this reason, it is best for museum staff not to suggest that the appraisal be completed before title transfer. Donors do not need the appraisal until their tax returns are due (including extensions) though many donors request their appraisal report earlier for planning purposes.
There are various ways for a donor to get information about an object being considered for donation. The donor can request a restricted appraisal (limited utility) or an oral appraisal (as explained previously) for tax planning. This is less expensive because even though the same amount of research and analysis must be completed for each, an extensive ap praisal report is not prepared for a restricted appraisal and the oral report is verbal. The donor would need another appraisal report to be completed for the donation for income tax purposes. Donors of art can also get an advanced review from the IRS before they file their income tax return. For works of art more than $50,000, they can request a statement of value which is then attached to the donor’s tax return. However, the appraisal report for the property must already have been completed. See the IRS website for more information on statements of value.36
The date that a museum considers to be the date of title transfer should be documented in the collection management policy. Usually title transfer is constituted by offer (letter of intent), possession, and acceptance (e.g., the letter sent after the governing board approves a gift). Sometimes, title transfer is governed by state law, so be sure to check with an attorney. The deed of gift is not always the instrument of title transfer, but there should be a document with two signatures. Sometimes a museum sends an unsigned deed to the donor clarifying that the counter signature will be returned after acceptance by the museum’s governing board and firmly stating that the donor’s signature does not finalize their gift. Once the gift is approved, the museum sends a fully executed agreement to the donor. Note that the effective date of the conclusion of fair market value must match the date that the donee lists on part IV of the donee acknowledgment of Form 8283, the date of title transfer or gift acceptance.
Donors can make a charitable contribution for the value of an undivided portion of their entire interest in a property. One of the changes the Pension Protection Act (PPA) enacted applies to the donation rules of fractional interests. Before the PPA, a donor could donate a percentage of a property during a calendar year and receive a tax benefit for the percentage of the full fair market value at the time of donation. This was true for the first year, and each year thereafter an additional fraction was donated; there was no limit to how long the donor could wait to donate the rest of the fractional interests. Multiple donors could donate different percentages of the same property. The rules changed after PPA enactment. Under the current rules, when donors make an additional fractional interest contribution, the deduction on their taxes is determined by using the lesser of the fair market value of the property at the time of the initial contribution, or the fair market value of the property at the time of the additional contribution, and all fractional interests must be donated to the same institution within ten years or by the time of the donor’s death, whichever comes first.
The date of the PPA enactment—August 17, 2006—is significant for museums that accept long-term fractional interest donations. If the donation of a fractional interest occurred prior to this date, the old rules apply. For any fractional interest donation made after August 17, 2006, the clock starts ticking for adherence to the new PPA statutory rules. A contribution made before the date of enactment of the PPA is not to be treated as the initial fractional contribution. However, if another fractional donation was made after August 17, 2006, the fair market value at that time becomes the benchmark as the first fractional interest contribution.37
As an illustration, if a donor gave 20 percent of a tangible property on June 1, 2005, and then donated the final 80 percent on June 1, 2019, the donor can take the remaining percentage based on the fair market value as of June 1, 2019 (assuming all the other rules were followed). However, if a donor gave 20 percent on June 1, 2005 and then gave an additional fractional interest of 30 percent on June 1, 2019, the donor would receive a deduction of 30 percent of the fair market value as of June 1, 2019, establishing a new benchmark. That fair market value is now the highest one the donor’s deduction will be based on in future gift years. Future donations will be based on the fair market value of the property on June 1, 2019 or that of the year of donation, whichever is lower. In addition, 100 percent of the gift must be donated by June 1, 2029.
Museums often refer to a percentage gift as a partial gift. As the term partial interest has a different meaning for the IRS, it would be more practical for staff to change the language and use the IRS term fractional interest gift or fractional gift to comply with section 170(a) of the Internal Revenue Code.
A bargain sale is one in which a donor, with a charitable intent, essentially gives part of the item as a charitable contribution and sells the other part to the donee. In other words, it is a sale (or exchange) for less than the property’s fair market value—part charitable contribution and part sale or exchange. In this situation, museums are expected to comment on the value of the property.38 The museum must perform research to determine what they should pay for the object or hire a qualified appraiser to assist with market value (a value like fair market value but when a sale is expected within a particular time frame). The donor uses a separate qualified appraiser to prepare a qualified appraisal for their deduction, claiming the difference between the fair market value and the agreed-on sales price as their deduction.
For example, suppose a donor owns a rare manuscript that she’s willing to donate to a qualified organization. She agrees to donate 50 percent of the manuscript and have the donee buy the remaining 50 percent. The donee determines that the full value is $100,000 and agrees to pay $50,000 for a 50 percent purchase. Separately, the donor obtains a qualified appraisal from a qualified appraiser who concludes a total fair market value of $80,000. The donor can take a fair market deduction of $30,000 which is the fair market value ($80,000) minus the amount paid by the donee ($50,000).
The donee’s collection management policy should address the museum’s guidelines for bargain sales and describe how the museum determines the price if an appraiser is not used. A museum should acknowledge in writing that it is purchasing the property for less than the fair market value. This type of donation and sale combination is reported in Part l of Form 8283.
Charitable contributions can be designated for either the exempt purpose of the museum (related use) or its unrelated use. Its use is unrelated if the “use by the donee is not related to the purpose or function constituting the basis for its exemption.”39 The typical related use of a gift is for the museum’s permanent collection, where normally its safekeeping is at the highest level (e.g., it is afforded preservation and conservation), and there is an opportunity to exhibit the object for the public’s benefit. A typical unrelated use is accepting an object for sale in a fundraising auction, regardless of how the monies raised will be used. If the property is not for the institution’s permanent collection, it would be sensible to check any gray-area uses (e.g., for a study collection or to exhibit in staff offices) with legal counsel to ensure that the charity is appropriately signing off on Section IV of Form 8283 for gifts more than $5,000.
If the donee (the museum) sells, exchanges, or otherwise disposes the property within three years after title transfer, it must submit Form 8282 within 125 days after the sale and provide a copy to the donor.40 Museums should be cautious about including an agreement not to sell the gift on their deed because that could constitute a restriction that the appraiser would have to consider when concluding fair market value.
With some exceptions, a full gift of long-term capital gain property to a qualified 501(c)(3) organization allows donors to receive a deduction on their income taxes for the property’s fair market value. If the contribution is short-term capital gain property (also known as ordinary income property), the donor can only deduct cost basis or fair market value, whichever is less. The donor would still need an appraisal if the property is more than $5,000 to establish which amount is smaller. In essence, ordinary income property is property that has been owned for one year or less, held as inventory by an art dealer, donated by the artist, donated by a donor who received it as a gift from the artist (who would receive the same basis as the artist), or a gift to a charity for an unrelated use. Short-term capital gain property can become long-term capital gain property if, for example, property is held longer than a year, or if a gift from an artist is inherited. In that case, the property changes character and it becomes long-term capital gain property, and there is a step-up in the cost basis to the fair market value on the date of the artist’s death or an alternative valuation date.41
Finding the appropriate path to an object’s value can mean having to choose from several forks in the road. Choosing the right route is easier if you know the reason for the trip, understand and respect the rules of the road, follow the trail markers, and most important, ask for help from an experienced guide. When dealing with any tax-related issue, follow best practices, and check first with the museum’s accountant or legal advisors, and research online to see if there is new guidance or case law.
Working with professional appraisers can help museums navigate the ins and outs of how value is concluded and avoid the potential obstacles and consequences that can arise when best practices and laws are not followed. Understanding valuation can also help museum staff guide their patrons through the donation process, learn more about the objects in their collection, and stay current with the laws that affect their collection and overall museum policies. •
1. Available at: https://www.govinfo.gov/content/pkg/STATUTE-103/pdf/STATUTE-103-Pg183.pdf.
2. Available at: https://www.appraisalfoundation.org.
3. Available at: https://www.appraisalfoundation.org.
4. Available at: https://www.appraisers.org/.
5. Available at: https://www.appraisersassociation.org/.
6. Available at: https://www.isa-appraisers.org/.
7. The Appraisal Standards Board, Uniform Standards of Professional Appraisal Practice (Washington, DC: The Appraisal Foundation, 2020–2021), FAQ 43, pg. 205.
8. Available at: https://www.chicagotribune.com/news/local/breaking/ct-moon-dust-bag-auction-met-20170720-story.html.
9. Personal Property Committee, American Society of Appraisers, Monograph #2, Type of Value, 2010, pp. 2–9.
10. 26 U.S.C. §170(f)(11)(E)(ii).
11. Available at: https://www.ustaxcourt.gov/UstcDockInq/DocumentViewer.aspx?IndexID=7051553.
12. The Appraisal Standards Board, Uniform Standards of Professional Appraisal Practice, FAQ 135, pp. 244–245.
13. I. P. DeAngelis and L. Hersh, Museum News (Washington, DC: American Association of Museums, September/October, 2001), pg. 48.
14. Personal Property Committee, American Society of Appraisers, Monograph #2, Type of Value, 2010, pp. 2–9.
15. Available at: https://www.arts.gov/sites/default/files/TheAct.pdf.
16. Available at: https://www.arts.gov/artistic-fields/museums/arts-and-artifacts-indemnity-program-international-indemnity.
17. Available at: https://www.arts.gov/artistic-fields/museums/arts-and-artifacts-indemnity-program-international-indemnity.
18. § 1201(2), 40 Stat. 300, 330 (1917).
19. Available at: https://www.irs.gov/pub/irs-tege/eotopica85.pdf.
20. November 2019 revision—used if a donee receives or any object or group of similar objects in aggragate of $5,000 or more.
21. Used if a donee who has received a donation sells, exchanges, or otherwise disposes of the donated property within three years of the effective date (title transfer). The donee must furnish a copy of Form 8282 to the donor.
22. The appraiser cannot be the taxpayer, the donee, a party to the transaction in which the taxpayer acquired the property, an employee of any of the above, or any person whose relationship with the taxpayer would cause a reasonable person to question the independence of the appraiser.
23. American Association of Museums and Association of Art Museum Directors, Gifts of Property: A Guide for Donors and Museums (Washington, DC: American Association of Museums, 1986), pg. 9.
24. § 1.170A–17 Qualified appraisal and qualified appraiser.
25. IRS Publication 561, April 2007, pg. 2.
26. IRS Publication 1771, March 2016, pp. 2–3.
27. 26 CFR 1.170A-13(f)(2)(ii).
28. 310 Retail, T.C. Memo 2017-164.
29. Available at: https://www.law.cornell.edu/cfr/text/26/25.2512-1.
30. 26 CFR § 1.170A-1(c)(2).
31. California Code, Code of Civil Procedure–CCP § 1263.320(a).
32. Definition stems from the decision of J. Cattanach in Henderson v. Ministerof National Revenue, 1973 Carswell Nat 189, [1973] C.T.C. 636, 73 D.T.C. 5471.
33. IRS Publication 561, April 2007, pp. 4, 8–10.
34. Available at: https://www.irs.gov/appeals/art-appraisal-services.
35. 26 CFR § 1.170A-13(c)(4)(iv)(D) and Form 8283 instructions, pg. 7.
36. Available at: https://www.irs.gov/appeals/art-appraisal-services.
37. Available at: http://www.jct.gov/x-38-06.pdf.
38. M. C. Malaro and I. P. DeAngelis, A Legal Primer on Managing Museum Collections, 3rd ed. (Washington, DC: Smithsonian Books, 2012), pg. 411.
39. 26 U.S.C. § 170 (e)(1)(A)(i)(I).
40. Form 8282, April 2009.
41. Venable LLP, White paper, 2012, Estate Planning for the Artist and the Art Collector, pp. 6–7.